SELF-EMPLOYMENT

Self-employment refers to the status of an individual who—rather
than accepting a position as an employee of another person or
organization—chooses to go into business for him or herself.
Self-employment offers individuals a number of advantages, from the
freedom to work without supervision to the ability to deduct the costs of
doing business for tax purposes. But it also has some potential drawbacks,
including uncertain levels of income, long working hours, isolation, and
the need to fund one's own health insurance and retirement plans.
People choose self-employment for a wide variety of reasons. Some desire a
change in lifestyle, some are unable to find other employment, some want
to work at home in order to care for small children, and some are retirees
seeking additional income. Regardless of the under-lying motivation,
however, there are ways for self-employed persons to overcome the
potential drawbacks and increase their chances for success.

Individuals who choose self-employment must be aware of the rules
governing the treatment of free-lance employees (also known as independent
contractors). Classification of someone as an employee or a self-employee
is somewhat ambiguous and depends on several factors, including the degree
of independence, the freedom to hire others to do the work taken on, the
freedom to work for others, and the assumption of risks. Independent
contractors typically accept no fringe benefits and pay Social Security,
Medicare, and income tax installments directly. Employees have more
statutory rights, benefits, and protections than subcontractors, who must
generally provide these for themselves. But independent contractors have
advantages in terms of freedom, flexibility, and tax deductions.

The IRS applies a 20-part test in order to determine whether a certain
worker should be classified as an employee or an independent contractor.
The main issue underpinning the test is who sets the work rules: employees
must follow rules set by their bosses, while independent contractors set
their own rules. For example, an individual who sets his own hours,
receives payment by the job, and divides his time between work for several
different employers would probably be classified as an independent
contractor. Other criteria involve who provides the tools and materials
needed to complete the work. For example, an individual who works at an
employer's facility and uses the employer's equipment would
be considered an employee, while one who works at a separate location and
provides her own equipment would be classified as an independent
contractor. Finally, an independent contractor usually pays his own
expenses of doing business and takes the risk of not receiving payment
when work is not completed in accordance with a contract, while an
employee is usually reimbursed for business-related expenses by the
employer and receives a paycheck whether his work is completed or not.

An individual's status as a self-employed, independent contractor
can be reinforced by having multiple clients, being paid by the amount of
work done rather than by the hour, or obtaining an employer identification
number from the IRS. Working under a business name also helps reinforce
this status. Printing invoices, business cards, and stationery can also
help identify someone as a self-employed person. In general, the person
must demonstrate that he or she is in business for the purpose of making a
profit.

THE GROWTH OF SELF-EMPLOYMENT

The concept of self-employment received increased attention in the 1980s
and early 1990s as many large firms responded to increased competition and
a lingering recession by "downsizing," or reducing the size
of their permanent staffs and hiring temporary employees and independent
contractors to reduce overhead. The financial impact of workers'
compensation, Social Security, and job protection laws also made employers
more cautious about hiring full-time employees. While in the past a large
company using free-lancers seemed to imply a crisis, it became a
commonplace way to control costs and try out new talent in the 1990s. At
the same time, many employees who were laid off chose to go into business
for themselves rather than reenter an increasingly un-stable work force.
The growth of self-employed professionals, in turn, enabled smaller
companies to en-list the services of people who have had experience at
larger, more sophisticated companies, without the cost of hiring them
full-time.

Another factor influencing the growth of self-employment was that personal
computer and communications technology made working at home more feasible
throughout the 1980s and 1990s. Mastering these technologies has become
essential for those without staffs. Through cellular telephones and
pagers, the self-employed professional can stay in touch with clients
throughout the day. In addition, computer technology made instantaneous
local, cross-country, and international networking and research feasible.
The relatively low price of personal computers, peripherals, and
communications equipment have enabled many more people to conduct business
independently.

By 1993, one-fifth of all new jobs in the United States were created by
self-employment, and self-employed persons accounted for 7.6 percent of
the work force. In fact, job growth in this category increased almost
twice as fast as overall job growth. The highest growth came in the
finance, insurance, property, and business services
industries—areas where professionals could expect to earn more by
becoming independent. In the late 1990s, the number of self-employed
Americans actually declined slightly as a percentage of the U.S. work
force, and according to some studies, only 2 percent of people who go the
entrepreneurial route stay self-employed 10 years later. But despite such
sobering statistics, starting one's own business remains a dream
that continues to be pursued by millions of individuals every year.

CONSIDERATIONS IN SELF-EMPLOYMENT

Self-employed individuals as a whole tend to work longer (an additional
17.5 hours per week, according to one study) and harder than their
colleagues who are organizationally employed. Moreover, self-employed
people often operate under uncertain payment schedules and must make
outlays from personal earnings for insurance and retirement. In addition,
their salaries and assets are dependent on their work contributions in a
more intimate way than are those of their colleagues. The entrepreneurial
role is also often more physically and psychologically stressful due to
the investments in energy the jobs demand.

ISOLATION AND NETWORKING
Isolation often proves to be an important source of psychological strain
for self-employed individuals. The environment of the typical
self-employed individual is quite different from the corporate environment
where many professionals gain their experience. This is one reason contact
with supportive colleagues becomes crucial. Mentors can provide advice
regarding business aspects of a new business owner's operation.
Trade and professional organizations can be an excellent way to establish
contacts with peers. Tenacity in networking has been cited as a key to
survival for business owners, some of whom maintain databases of thousands
of contacts. These contacts are also vital in referring clients and
providing market information. The role of the contact is made more
important as the self-employed individual typically has no staff for
marketing support.

It is difficult to exaggerate the importance of referrals to the typical
independent professional. Since relationships are so vital, one must
exercise the utmost delicacy in terminating employment with one's
former employer or turning down a job. One's former employer can
even become a good client, besides providing valuable referrals. When
turning down clients, the self-employed person can protect those
relationships by making referrals or even subcontracting to other
colleagues in their network. Provided the work done is of quality, this
can strengthen one's reputation as a purveyor of
talent—whether one's own or an associate's. When the
client calls back with a more appropriate assignment, the contractor has
the choice of the business.

As they begin their enterprises, many self-employed individuals feel
compelled to accept a variety of assignments due to sheer scarcity of
work. However, specialization can help ensure their long-term survival.
For one thing, corporate clients can often find a generalist's
abilities in-house. Also, specialization may allow professionals to
broaden their client base geographically, thus freeing their fortunes from
fluctuations in the local economy. These factors can enable the specialist
to earn higher fees and work more consistently. Paradoxically,
one's work as a specialist can garner referrals outside
one's specialty, so specialization might not be as limiting as a
strict definition would imply. The self-employed should be cautioned
against changing their specialties too often, as this can confuse clients
and make their own operations inefficient.

TAX IMPLICATIONS
Self-employment entails both tax advantages and disadvantages. In terms
of advantages, individuals who are classified as independent contractors
can deduct work-related expenses for tax purposes. In addition,
independent contractors often qualify for tax deductions for using part of
their home as an office and for salaries paid to other people, while
employees usually do not. Independent contractors also can claim
significant deductions for medical insurance, transportation, office
supplies, and a host of other operating costs.

The main tax disadvantage for self-employed persons is that they must pay
the full amount of Social Security and Medicare taxes themselves and make
quarterly estimated tax payments to the federal government. For those who
are organizationally employed, the employer withholds income taxes and
pays half of their Social Security and Medicare taxes.
Although the payment of Social Security and Medicare increases the tax
burden of self-employed individuals, these amounts are based on net,
rather than gross, earnings. For this reason, it is essential for small
business owners to keep an accurate record of expenses. Self-employed
individuals also file quarterly taxes.

INCREASING THE CHANCE OF SUCCESS IN SELF-EMPLOYMENT

Self-employment, whether by choice or necessity, does not include any
guarantee of success. In fact, nearly two out of every three new
businesses fail within five years. But the chances of success can be
greatly improved with careful planning, prior savings, and a sound
marketing strategy. It may also be helpful to make the transition to
full-time self-employment gradually. One option is to
"moonlight," or work part-time as a free-lancer while
maintaining at least part-time employment on the side. Although some
employers frown on this arrangement, it can provide an individual with
time and money to develop a client base and a business plan. Those
planning home-based businesses should also take time to prepare family
members for the changes that will take place.

Some prospective new business owners also try to establish one stable
client relationship that will provide steady income during the search for
additional clients. A particularly attractive option may be an
individual's former employer, which will already be familiar with
the would-be entrepreneur's reputation and abilities. For this
relationship to succeed, however, it is important that the individual use
an honest and professional approach when severing ties with their
employer. Of course, your employer may not react warmly to such an
arrangement if your new business is a potential threat to its own
financial fortunes.

Although one stable client relationship can help establish a new business,
it is also important that the self-employed person develop a marketing
strategy to find new clients and grow. Many new business owners become so
busy serving their existing clients that they do not devote sufficient
time to marketing. Sending out brochures, networking, and joining
professional organizations are a few possible marketing strategies.

Finally, self-employed individuals should take an organized approach to
all business activities in order to increase their chances of success. It
may be helpful to draw up a business plan to follow when starting and
growing a new business. This plan can help a self-employed person evaluate
strategies, plan expenditures, and motivate him or herself. It is also
important to keep careful records of income and expenses, set aside money
for taxes, and insist upon contracts for all work performed.

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User Contributions:

I was so interested with this article but the stumbling block which face many of indigenous especially in developing countries or less developing countries is where they can generate capital which could be used for investment purposes to employ themselves. this has been seen as a great challenge to many people in employing themselves that is many of them lacked skills and knowledge on what to do in order to generate capital that could be used for conducting different business or activities,hence there is a need to conduct various training to these vulnerable groups on how they can employ themselves.

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